Ask the Expert - Sourcing - Operational

In this session we covered the key activities of the sourcing process in more depth. We looked at the various sourcing strategies, supplier relationships management, Outsourcing, and subcontracting, in order for procurement professionals to better source supplies and develop a sourcing strategy according to best practice.

Ask the Expert - Sourcing Operational Q&A

Q 1 - What advice would be recommendable in working on avoiding misalignment between capex and opex mainly Local government institution

A – First, it is important to distinguish between the two expenditures which are based on the categories of spend. In procurement terms they are classified as capital procurements and operational procurements. Capital procurements refer to acquisition of capital goods/assets such as equipment,buildings,Vehicles,Computer Servers,etc ,while operational procurement is concerned with the procurement of items with short-term benefits which may include items related to Maintenance, Repair and Operations (MROs).A conventional Opex budget would also include employee wages, utility costs (overheads),insurance costs,e.t.c.

To answer the question, misalignment of the two expenditures will depend on the treatment of the expenditures according to your local government accounting procedures, principles and related Accounting Standards. Basically, before the institution procures the capital items certain decisions have to be made. Such decisions may include cost-benefit analysis and/or lease or buy. Capital assets have high initial capital outlay and may incur life-cycle costs which may have to be matched against the benefits expected from the assets. The best advice is to work with your Finance Department to ensure that the costs being incurred to maintain or operate the assets are clearly aligned to the benefits your local government institution expects to obtain.

Q 2 – Is it the value of the procurement that will determine to be a contract or a purchase?

A – Partly. It varies from organisation to organisation and between countries, and you should always refer the financial rules and regulations in your country (i.e your Procurement Law and Procurement Manual). In African countries, the value of procurement may determine whether this is a contract or purchase. The value threshold varies from country to country. Organisations have different value thresholds under which they would place a purchase order, even if this is for services e.g low value purchases, works etc.

Internationally, what we see the most is to establish a contract when buying services, and a purchase order when buying goods. When buying a mix of services and goods, then a contract is established if buying more services than goods (e.g. 75% services and 25% goods), and a purchase order if buying more goods (75% goods and 25% services).

It is important to understand the rules that apply locally.

Q 3 - How do you evaluate the Supplier’s management of their Supply / Value chain?

In my experience, specifically in the pharmaceutical industry, there is a big gap in translating demand to the physical act of supply, both at the shop floor level (production) and in sourcing of materials.

A – This question has two parts. The first part is about evaluating the supplier’s management of their supply/value chain. The second is about the gap between supply and demand for pharmaceutical products.

To answer the first part of the question requires an understanding of the supplier’s suppliers. The most common approach to this is to develop a criteria based on your expectations from the supplier, since the performance of your supplier’s supplier will have an indirect effect on the performance of your organization. You can apply the same criteria you would use to evaluate the supplier and which may include:

• Quality performance and history
• Production capacity
• Human resource capacity
• Risk appetite
• Environmental impact of their activities
• Technology level
• Cost

On the second question, closing the gap depends on the availability of data for production decisions and information sharing between the supply and demand sides. This is what will inform the acquisition of raw materials for production that match the market demand. Collaboration with the consumers such has health facilities will help in determining or forecasting demand. Such collaboration may involve integration of data/information sharing systems between the buyers and suppliers to reduce the gap or uncertainty.

Q4 - Who is responsible for delivering product to point of use? And where does the supplier responsibility end?

A – The responsibility for delivering a product to the point of use depends on the structure of a given supply chain. Ordinarily, products would be received in an organization’s storage facility or warehouse from where they would be distributed or issued to the point of use. This can be done by warehousing and logistics function or the supplier if arranged with the procurement function or the former. The end of the supplier’s responsibility depends on the contractual arrangement and the nature of the product. If for example, the product being delivered is a consumable such as a lab reagent the supplier’s responsibility could end at the receiving function once the receiving personnel stamp and formally accept it.However, if the product is a capital asset such as a diagnostic equipment the supplier’s responsibility may extend to maintenance depending on a written agreement between the parties. The agreement may split the responsibility into two phases. The first phase may be delivery, installation and commissioning while the second phase may be the maintenance. This can be done through issuance of two separate contracts, one for the delivery and the other for maintenance. The contracts or agreements will spell out the parties’ responsibilities and obligations.

Share your new knowledge with the HPA Community on Discuss